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Apple Inc. (AAPL) Option Player Prepares for the Worst

One speculator scooped up deep out-of-the-money puts on Apple Inc.

by 2/13/2014 10:57 AM
Stocks quoted in this article:

Option Brief: Apple Inc. (NASDAQ:AAPL) is up 0.8% at $540.31 in early trading, as Wall Street weighs rumors of a revamped TV set-top box coming in the next few months. The stock has come a long way since grazing the $500 level a couple of weeks ago, boasting a month-to-date gain of 7.9%, yet some options traders are either betting on a significant downturn in the short term, or are picking up options "insurance" for their AAPL shares.

So far today, the stock has seen about 72,000 puts cross the tape, representing a 20% mark-up to typical intraday levels. The biggest trade of the day thus far involved a block of 5,000 April 400 puts, which changed hands at the ask price of $0.30. Implied volatility jumped 1.6 percentage points at the time of the trade, pointing to fresh initiations.

By buying the deep out-of-the-money (OOTM) puts to open, the trader has one of two motives: to profit from a plunge south of $400 -- a 26% drop into territory not explored since June 2013 -- or to hedge against a major downturn. In the case of the latter, the speculator's goal remains for AAPL to continue its long-term uptrend, as he's a shareholder above all else. The OOTM puts merely lock in an acceptable price at which to sell his stake ($400 per share), should the equity take a turn for the worse before April options expiration.

Currently, Apple Inc.'s (NASDAQ:AAPL) Schaeffer's Volatility Index (SVI) sits at 18%, just 1 percentage point shy of an annual low. In other words, now is an opportune time to buy short-term options at a bargain-basement price, relatively speaking.


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